Cathie Wood, founder and CIO of Ark Invest, analyzed the newly passed Inflation Reduction Act in a recent video and explains why she believes it will not reduce inflation.
She says that according to the model, growth will be slowed and as such productivity will probably be lower. While this will reduce the rate at which inflation increases, it will definitely not stop it. She also highlights the effect it will have in terms of trade, as corporations with more than a billion dollars in profits who were paying less than 15 percent in corporate taxes for whatever reasons are now being forced to pay a minimum of 15 percent.
In terms of monetary policy, we saw a fall from 27 percent money growth on a year-over-year basis to 5.9 percent in June and the July figures might remain around this range. Looking at the money growth figures sequentially, you see that over the last few months, these figures have flattened out. If this trend is sustained we might see the number bottoming down to zero or possibly even negative, the first time it would be negative since the Great Depression, within the next six months.
Typically, in a recession, we see fiscal and monetary policies being counter cyclical to stimulate the economy. But this time around, they seem to be doing the exact opposite of that.
Wood points out that the Fed seems to be basing their policies on lagging indicators. She believes the restraints being brought on by these monetary and fiscal policies in the midst of a recession will cause a much faster decline in prices that the markets had been expecting.
The second lagging indicator that the Fed is focused on is employment, arguing that the economy cannot possibly be in a recession due to the robust amount of jobs being created.
But every other employment indicator shows instead that employment has been weakening, initial unemployment claims have gone up by 55 percent and this amongst other factors points towards these strong employment numbers eventually being revised and worse than initially portrayed.
The Ark Invest founder goes on to explain why she believes the economy has entered a recession. Average hourly earnings peaked at 0.5 percent from 0.3 percent but real average hourly earnings are down 3.6 percent.
This means that purchasing power associated with earnings has gone down somewhat dramatically and consumers are, as expected, very unhappy about this. The University of Michigan consumers sentiment survey’s July numbers were at an all time low, lower than the early 80’s when the economy experienced back to back recession.
